Week Ahead: Stocks Waiting Until the FOMC

  • Investors understand – the Fed is synonymous with business
  • All eyes are on the FOMC next Wednesday.
  • Inverse Yield Steepening Raises Likelihood of Recession Consensus

It’s official. The Federal Reserve controls the markets. A perhaps more accurate characterization is that investors are beginning to accept that the Fed is in charge. Perhaps the best way to look at it is for investors to finally understand in their thick skulls that the Fed will hold on until it hits the highest level in four decades.

In the second quarter, better-than-expected earnings boosted stocks. On July 19, the gained 770 points, or 2.5%, as traders convinced themselves that the market had bottomed out amid strong corporate results. Of course, analysts rated corporate earnings as “strong” after lowering expectations due to soaring inflation. Then they were justified in their surprise when companies managed to perform so well (compared to lower expectations) in an inflationary environment.

Here is my opening title for July 27: “.”

However, something has to give, and nothing is for nothing. So while analysts lowered their expectations for the second quarter, they made up for that with higher expectations for the following two quarters.

However, it was time to pay the piper last week, and investors have suffered the worst week since the June market low of this year that they insist it is a low.

Source: Investing.com

If you haven’t made the connection yet, artificial corporate success amid soaring inflation allowed analysts to justify the heightened risk, which created the June low that so many of my readers have insisted was it was a hollow.

Now, even though I didn’t think the June low was a low, I didn’t think to know it was not a background. I made an educated guess based on the preponderance of evidence. I kept saying that if the average shows an ascending series of peaks and troughs, I will reverse my position. However, the bulls, and probably the retail bulls, had a religious belief that stocks had bottomed out and would now revert to an ongoing bull market.

Given that the driving fundamentals are the inflation-interest rate pair, I argue that stocks will hit a new low below June, extending the downtrend and bear market. Until that happens, I will not say categorically that stocks are necessarily headed lower.

I elaborated on the different Amazon (NASDAQ:) trends based on time frames. However, based on the comments, some readers did not understand the post or its title. You need to clarify your timeline when declaring you are bullish or bearish. While I’m bearish on the primary trend, I was . Looks like I was wrong as they hit a new short term low. Under an aggressive interpretation, this is a short-term downtrend.

At the same time, a conservative technician would wait for another peak and trough to have a descending streak independent of the peaks and troughs of the uptrend. Hope we get it soon. Friday’s trading created a hammer, which I believe will “hammer” a short-term low, retesting the previous high when continued supply is likely to pull the price back even lower, posting another pair of highs and lower troughs.

Given that the FOMC repeated another 75 basis point hike on Wednesday, investors are awaiting guidance from the Fed and businesses. The latter has become a hot potato since FedEx (NYSE:) rattled investors on Thursday by withdrawing its full-year earnings forecast, as the company suffered its biggest decline in more than 40 years. Note how the timeline matches the fastest interest rates and inflation.

Meanwhile, fund managers increased cash balances to 6.1%, the highest level in more than 20 years. Rising interest rates make cash investments attractive for both positive and negative reasons. The positive reason is a favorable return on interest rates; the negative is avoiding the risk that high rates add to equities.

Despite the higher interest rate, the “yield curve is expected to invert the most in 40 years”, showing that the market expects the Fed to have to rise significantly more in order to bring inflation under control .

This tension between inflation and interest rates is perhaps what has slowed the progress.

Dollar Index Daily Chart

Source: Investing.com

While the greenback is in an uptrend, it could develop a small head and shoulders top from August 22nd. If this scenario materializes, this small H&S could be at the head of a larger H&S since mid-June. Additionally, the MACD and ROC are trending lower, with the latter triggering a negative divergence with the rise in price, from August 23 to September 7.

We find the same tension in .

Gold futures daily chart

Source: Investing.com

Gold plunged on Thursday, completing a daily ascending flag, bearish after the previous decline. The flag height of $80 implies a target of $1,630. However, the price has meanwhile found support by the lows of $1,670 since 2020. Friday’s bounce could be nothing more than a move back to retest flag resistance, after a short squeeze, before he continues towards his goal. On the other hand, the two-year support could be a bullish stronghold that undermines the flag bears. That’s not to say there’s no commerce here; you need to commit to a consistent strategy based on your timing, budget, and temperament.

Bitcoin Weekly Chart

Source: Investing.com

fell 7% last week due to Tuesday’s 9% drop. As I did, a bullish attempt to take a bearish stronghold was fatal. However, to continue the downtrend, bitcoin will need to trade below the September 7th low, which is what I expect the virtual currency to do, based on its long-term supply-demand balance, what I was.

fell for the third week on lingering global demand concerns amid a slowdown.

WTI Crude Oil Futures Weekly Chart
WTI Crude Oil Futures Weekly Chart

Source: Investing.com

Oil extended the symmetrical triangle, reaching its implied target of $56.

Disclosure: At the time of publication, the author had no position in the titles mentioned.

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About Troy McMiller

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